5 Factors That Make Estee Lauder (EL) a Promising Bet Now

The Estee Lauder Companies Inc.’s EL stock has been moving up the charts, thanks to its superb past performance and strong presence in the cosmetics industry. Evidently, this beauty products manufacturer has surged 66.2% so far, this year, crushing the industry’s growth of 18.7%. So, let’s delve deeper into the factors that have spurred investors’ confidence in this Zacks Rank #1 (Strong Buy) stock, which is most likely to keep its spectacular show on.

Sturdy Surprise History

Estee Lauder has been riding on its solid surprise history, which was retained in first-quarter fiscal 2018. Notably, Estee Lauder marked its 13th consecutive quarter of earnings beat, while sales kept its positive surprise trend alive for the third straight time. Also, both top and bottom lines advanced year over year, with the latter gaining from the buyouts of BECCA and Too Faced. Moreover, the company witnessed strength across nearly all geographic regions and product categories, with skin care standing out. Sales were also fueled by growth in several developed and emerging markets (especially China and Hong Kong). Further, growth in travel retail and online channels have been driving Estee Lauder’s performance.

Outlook Boosts Estimates

Management expects continued growth opportunities in the global prestige beauty industry, which is anticipated to grow 4-5% during fiscal 2018. Additionally, acquisitions, better quality products, innovation and improved market reach are expected to positively impact sales during the year. These factors encouraged the company to raise its earnings and sales outlook for fiscal 2018. For fiscal 2018, Estee Lauder now expects net sales to grow in a range of 10-11%, while the company now envisions adjusted earnings in the band of $4.04-$4.12 per share for fiscal 2018.

This raised view, along with an encouraging guidance for the second quarter boosted analysts’ sentiments. Incidentally, the Zacks Consensus Estimate for the second quarter and fiscal 2018 has risen from $1.41 to $1.42 and from $3.97 to $4.14, respectively over the past 60 days. Also, investors turned optimistic on the stock, as shares of the company have jumped 12.4% since the earnings release.

Solid Presence in Emerging Markets, Especially China

Estee Lauder garners a significant amount of revenues from the emerging markets and has bright prospects in China, wherein sales soared nearly 50% in the first quarter. This was driven by double-digit growth in all brands, with MAC, Tom Ford and Lab Series businesses nearly doubling year over year. Also, management stated that its makeup business doubled for the second straight quarter, whereas performance of its skin care and luxury fragrance business also remained favorable in the quarter. The company’s Chinese operations have been gaining from rising demand from millennials, and management envisions continued strength in luxury products in China, which keeps it encouraged about making incremental investments in the region. The company is also growing its online sales in the region through T-mall, the largest digital platform run by Chinese e-commerce giant, Alibaba.

Buyouts — Major Growth Driver

Estee Lauder’s acquisitions of BECCA and Too Faced (during first-quarter fiscal 2017) has strengthened its fastest growing prestige portfolio and contributed significantly to the reported sales growth in first-quarter fiscal 2018. Also, management expects these brands to contribute roughly 2 percentage points to the company’s overall sales growth in fiscal 2018.The investment in DECIEM — a fast-growing multi-brand company is also likely to aid beauty sales. Such acquisitions help the company to expand its portfolio apart from helping it attain the respective loyal customer base.

Strong Online Business to Boost Top Line

Estee Lauder has a strong online business and the company expects it to be a major growth engine for the upcoming few years. Notably, online sales grew 33% in first-quarter fiscal 2018, driven largely by increased traffic, order size and conversions. Thanks to technological advancement and the growing popularity of social media, mobile sales constituted about 70% of the company’s online traffic and remains a major growth driver. Well, Estee Lauder remains focused on widening its global online presence by adding new sites and expanding retailer distributions. Evidently, the company launched more than 100 sites in the first quarter.

Ross Stores, Inc. ROST delivered an average positive earnings surprise of 5.5% in the trailing four quarters and has a long-term earnings growth rate of 10%. The company carries the same Zacks Rank as Dollar General.

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